Draghi: ECB Ready to Act Again if Economy Weakens

Monday, 6 May 2013 | 8:00 PM ETReuters

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European Central Bank President Mario Draghi departed from a prepared speech on Monday to reiterate the central bank's readiness to cut interest rates again if the euro zone economy deteriorates further.

The eurohit session lows against the dollar and the yen after Draghi said in Rome the ECB would monitor incoming data closely and would be ready to cut rates further, including the deposit rate currently at zero.

The ECB cut its main interest rate to 0.5 percent last week after euro zone inflation fell sharply in April and unemployment hit a record high in March. It signaled then that it was ready to do more should the euro zone economy deteriorate further.

ECB Executive Board member Benoit Coeure said as much on Saturday.

Another cut could drive the deposit rate below its current level of zero. The ECB would then charge banks for holding their funds overnight, a step the ECB said it was technically ready for, but which could have major implications on funding markets.

"There are many complications and consequences to take into account that need to be studied carefully and the council has decided to study them, to analyse these consequences in order to be able to act if necessary," Draghi said, referring to negative deposit rates.

"We will also look at all the data on the euro zone economy in the coming weeks and if necessary we stand ready to act again," he said, referring to last week's rate cut, which the council did not agree unanimously.

Highlighting the opposition Draghi may face from some ECB policymakers to a further reduction, board member Yves Mersch, a hawk close to Germany's Bundesbank, said there could be limits to the effectiveness of instruments such as interest rate cuts.

Data released on Monday pointed to darkening growth prospects. The first reading of the euro zone's first quarter economic performance is due next Wednesday, and economists polled by Reuters estimate output fell 0.2 percent.

On Monday, European purchasing managers indexes (PMIs) suggested the euro zone's downturn dragged on in the current quarter, with Germany now suffering a contraction in business activity that has long dogged France, Italy and Spain.

Speaking in Italy, whose new Prime Minister Enrico Letta has been calling for an EU policy switch to focus more on growth and less on austerity, Draghi said high debt countries in particular must not reverse course while trying to stimulate growth.